Asset-based lending is a type of loan wherein a company uses its assets as a form of security. Typically, they’re structured as revolving lines of credit, allowing the borrower to take cash only when needed. Here’s a quick guide to what you should know about these useful financial instruments.

What Is Necessary To Qualify for an Asset-Based Loan?

Typically, these loans are offered to small to mid-sized companies. Applicants need to have a track record of financial stability and own assets with intrinsic value. For an asset to be considered usable, it must not be part of another loan agreement. Any venture seeking a loan must also be free of major issues, such as tax complications. Carefully review your business and see that it meets these requirements.

What Can Be Used as Collateral?

Accounts receivable, otherwise known as money owed by clients, is the primary form of collateral with these loans. Physical items, such as office equipment or inventory, may also be leveraged.

How Much Money Can You Get?

The amount of money that’s accessible under an asset-based loan is known as its borrowing base. This value is determined by calculating a percentage of the collateral’s value. Expect to be able to withdraw 75% to 85% of however much your receivables are worth. For physical items, the borrowing base is much lower, at 50% or less.

Asset-based lenders will thoroughly inspect your books before determining a final figure. Because accounts receivable is not a fixed amount, the borrowing base of asset-based lending supported in this manner can fluctuate.

What Happens When You Apply?

Your lender will calculate the value of your collateral by performing research and inspecting your accounting. Any negatives could have a detrimental impact on your loan. Typically, lenders will visit your business and interview certain employees. Protect yourself by preparing for this possibility, and expect to be charged a fee for one of these reviews.

How Much Does Asset-Based Lending Cost?

Several factors determine how much you’ll pay, including how much you’re borrowing, what type of collateral you’re willing to put up, and the overall risk that’s assumed by lending you cash. Expect to pay an annual percentage rate that falls anywhere between 7% and 17%. Ask about other charges that may come along with your contract.

Companies with significant assets that need cash flow should consider asset-based loans as a solution. Educate yourself about this type of agreement before heading to a lender and starting the application process.